America still has twenty years to significantly reduce the level of the national debt. If this does not happen, some form of default is inevitable, it appears From an analysis by economists at the University of Pennsylvania.

Economists used the budget model to outline scenarios for the growth of the US national debt. Currently, about $26,300 billion of the US national debt is owed to external creditors. This does not include US government debt, which brings the national debt to $33.2 trillion.

Economists say the United States has about twenty years to adjust fiscal policy so that the national debt is sustainable. “After that, future tax increases or spending cuts will not prevent the government from repaying its debt,” the decision states. “Unlike a technical default, which defers repayment, this default would be much larger and have an impact on the US and global economies.”

The twenty-year timeframe is still on the optimistic side, as it assumes a fiscal policy that stabilizes the debt burden. According to the approach Ben Wharton Budget Model The U.S. debt cannot exceed 200 percent of national income. Currently it is 98 percent.

However, the red line is already around a national debt of 175 percent of the economy, as financial markets assume the government will implement fiscal policy reforms, write authors Jagadish Gokhale and Kent Smetters.

If financial markets lose confidence in the US government’s ability to fully service the national debt, big problems could arise. This is because interest on the national debt will rise sharply.

Interest rates on US government debt have already risen sharply this year. Interest on 10-year US government bond Last week it rose to 4.8 percent. If that increase continues, borrowing costs for the U.S. government will rise and it will become more difficult to keep debt unaffordable.

If investors in US Treasuries realize this, they will demand even higher interest rates as a premium for default risk. This can cause a downward spiral.

Preventing this will require tax increases and cuts in federal spending, but such measures must be taken at the right time.

US government debt is increasingly weighing on the economy

With rising government bond yields, the debt ratio has become an increasing concern for US policymakers and investors. Net interest payments on US government debt will soon exceed the government’s defense spending.

Economists at the University of Pennsylvania point out that forecasts for the growth of the US national debt have become increasingly extreme over the past fifteen years. This can be seen in the diagram below.

In 2007, the US national debt was 35 percent of national income and was expected to decline to 20 percent of GDP within ten years.

In February of this year, the US national debt was 97 percent of national income and was expected to reach 120 percent of GDP within ten years.

“In contrast, US debt has been on a long-term upward trend and previous projections have underestimated that increase,” the researchers write.

Also Read: 3 ‘Creative’ Options to Prevent US Government Default If No Deal on Debt Ceiling